Thursday, October 08, 2015

D.C. Council Shouldn’t Regulate Airbnb

In late September 2015, two proposals, which would to add excessive regulations onto roomsharing applications such as Airbnb, were proposed to the D.C. Council. Airbnb has been under scrutiny in the past, but it is often because states and municipalities, sometimes wrongly, claim they are not receiving tax revenue from Airbnb transactions. However, in the District, Airbnb has already agreed to collect and remit the full tourist tax levied on short-term rentals.
It’s pretty clear that these two proposals have been initiated by the hotel industry and its employees in an effort to restrict competition in the marketplace. One proposal has been supported by Unite-Here Local 25, a union that represents 6,500 hotel employees in the D.C. area, and the other proposal was drafted by a coalition of large hotels located in the D.C. area.
The D.C. government requires individuals who share spaces for less than 30 days to obtain a business license, but both of the draft ordinances would limit what the license holder can do with his or her property. For example, the proposal backed by Unite-Here only allows a host to share one space at a time and requires that the owner/tenant be present while the rental occurs. The D.C. hotel industry’s draft legislation allows a host to share up to five units at a time but has strict requirements on the number of guests and the length of their stay. The Unite-Here proposal allows for food and alcohol sales if the host is properly licensed, but the hotel industry’s proposal prohibits such sales.
Public safety, consumer protection, and food and health standards are often appropriate, even necessary, regulations for state and local governments. But both of these proposals go beyond simple standards and instead create costs that ultimately will restrict competition from roomsharing applications and benefit the hotel industry and its workers.
In a Perspectives from FSF Scholars entitled “Eight Takeaway from the FTC’s Sharing Economy Workshop,” I said that reputational feedback mechanisms, which are inherent in roomsharing applications, enable trust between trading partners and filter out harmful economic actors:
On Airbnb, hosts will use reputational feedback to filter through strangers in order to find guests responsible enough to share a living space with. Yet guests are just as likely to rely on this reputational feedback mechanism to avoid unsafe or unhealthy living spaces. The transparency provided by competitors’ ratings and reviews allows hosts and guests to easily compare the trustworthiness of respective counterparts. Additionally, even if a host or guest is a first time user, the accountability provided by reputational feedback mechanisms incentivizes the user to be as responsible as possible.
Reputational feedback mechanisms produce a self-regulating marketplace, so additional government regulations would only levy unnecessary costs on consumers. In comments submitted to the FTC in May 2015, FSF scholars discussed the importance of policymakers to focus on consumer welfare, rather than the welfare of specific competitors:
It is also critical that federal, state, and local governing authorities alike remain closely attuned to concerns over consumer welfare, rather than competitor welfare. Special or partial laws and regulations designed to protect incumbent competitors from new sources of competition, even if undertaken under the pretense of protecting competition, are unjustifiable and will harm consumers. Hopefully, market incumbents opposed to the proliferation of innovative and disruptive new Internet services and applications will less frequently succeed in manipulating laws and regulations to stifle sharing economy services merely because they possibly may adversely impact preexisting businesses.
In the same Perspectives from FSF Scholars, I discussed why “deregulating down” is a more efficient way for governments to establish the proverbial “level playing field” between incumbent actors and new entrants:
Indeed, regulations and taxes should not be levied on businesses differentially without legitimate reasons. As I wrote about in a blog earlier in June 2015, David Hantman, Head of Global Public Policy for Airbnb, and the FSF scholars agree on that principle. However, subjecting new entities, like Airbnb, to old regulations lessens the competitiveness of the market because smaller firms and/or emerging firms are often not well-established enough or profitable enough to cover the costs of such unnecessary burdensome regulations.
To the extent there are concerns about the impact of differential regulations not based on legitimate reasons, equity should be accomplished by deregulating down, not by regulating up. Deregulating down gives consumers the freedom to choose which businesses provide the most value. As FTC Commissioner Maureen Ohlhausen stated during the workshop’s opening keynote address, “it is not for us in government to pick the winners and losers in the marketplace.”
The restrictions in these proposals make no sense when the impact they would have on the local community is analyzed. They create costs that impede the ability of local residents to act as entrepreneurs and provide more choices to lodging consumers. For example, the hotel industry’s draft legislation says “a property may not be rented out on a short-term basis if the owner has received affordable housing funds or if the property is rent controlled.” This requirement does not benefit the public or consumers; it simply eliminates less costly lodging options, which only favors local hotels. If anything, roomsharing should be embraced in these circumstances in order to reduce or offset the fluctuation in housing investment that rent controls and subsidies can exacerbate. Additionally, roomsharing allows poor residents to earn extra income.
It is important that the D.C. Council not adopt either of the proposals. These proposals create unnecessary costs for local residents and entrepreneurs. If adopted, they will reduce lodging competition, lower income for residents, and raise prices for consumers. 

Wednesday, October 07, 2015

Sprint's Spectrum Spectacle

As most readers of this space know, on September 28, Sprint released this statement: “After thorough analysis…it will not participate in the 600 MHz incentive auction.” The statement went on to say: “ Sprint has concluded that its rich spectrum holdings are sufficient to provide its current and future customers great network coverage and be able to provide the consistent reliability, capacity, and speed that its customers demand.”

As my mother used to say: “Now you tell me!”

I say this because, again, as most readers know, Sprint spent much time and money lobbying furiously to establish, maintain, and, if possible, expand the reserve spectrum the FCC set-aside to provide Sprint, T-Mobile, and others favored bidding treatment in the 600 MHz auction. If you peruse the relevant dockets (AU Docket No. 14-252 and GN Docket No. 12-268), you will find at least a couple dozen comments and ex partes to this effect. Of course, Sprint is perfectly free to spend its lobbying resources as it pleases. But, unfortunately, its extraordinary efforts to preserve and expand the reserve set-aside, although it was not alone, required others parties – and the Commission’s own staff – to expend extra resources as well responding to its pleas.

And, after all that, Sprint announces that its rich spectrum holdings are sufficient to provide its current and future customers great coverage network coverage.

There are some important lessons here that go way beyond lamenting the expenditure of time and resources.

The foremost lesson is one I have tried to hammer home for many years. Absent a true market failure – and there is not one with respect to the marketplace for broadband services, including wireless services, the Commission needs to quit trying to manage competition. While FCC Chairman Tom Wheeler and his colleagues may not accept the characterization, what else, but “managing competition,” to call the establishment of bidding set-asides designed to favor certain market participants in an auction?

And this is even more the case when the spectrum set-asides are intended to favor well-capitalized firms like T-Mobile and Sprint. I have never argued against foreign ownership of carriers participating in the mobile marketplace, and I don’t intend to do so now. Generally, the infusion of foreign capital into the U.S. from major corporations like Deutsche Telekom (T-Mobile) and Softbank (Sprint) is a net positive. But I see no reason why such foreign ownership should be favored as a matter of regulatory policy in the context of a spectrum auction or otherwise.

Here’s another problem, much documented in the “public choice” literature, with the Commission’s “managing competition” approach. It encourages even more special pleading in the future because all parties know the Commission’s door – its mindset, really – is receptive to accepting such entreaties. For example, in this case, a focal point all along of the special pleading regarding the 600MHz reserved spectrum has been that Verizon and AT&T already possess “too much” low-band spectrum relative to their competitors.

The notion of the Commission trying to assess the precise differences in the various spectrum bands relative to their marketplace value is highly dubious. In any event, isn’t it clear, now that the Commission has established the precedent of jiggering the auction on this basis, that Sprint will be enticed in the future to once again argue it needs some form of favored treatment because it lacks sufficient spectrum? This, even though Sprint decided not to bid on low-band spectrum in a special set-aside in the upcoming auction because “its rich spectrum holdings are sufficient to provide its current and future customers great network coverage.”

The Commission invitation to even more special pleading would be farcical if it weren’t sad.

Now, I appreciate that constructing and implementing the forthcoming 600 MHz auction is a very complex undertaking. I recognize that Chairman Wheeler and his fellow commissioners are working hard to try to ensure the auction is successful. I especially appreciate the dedication, hard work, and good faith of Gary Epstein, Howard Symons, Roger Sherman, and others on the Commission’s staff, as they put in long hours with the aim of conducting a successful auction.

But this too must be said. Whether through ingrained regulatory hubris, or through a more conscious determination not to relinquish any regulatory control, the Commission continues to try to “manage competition” in far too many instances when it should, instead, simply step away and rely on market forces.

Sprint’s spectrum spectacle presents just one more example.

Monday, October 05, 2015

Reforming Maryland Business Licensing Regime

Since taking office, Maryland Governor Larry Hogan has taken some important steps to make good on his pledge to promote Maryland’s economic growth. These steps include restraining government spending through a proposed 2% cut in the state’s budget, reducing fees paid by Maryland’s citizens to state agencies for various services by $10 million a year, and focusing attention on regulatory reform. 
These are commendable steps in the right direction.

But I don’t doubt that Governor Hogan knows there is more that can be done in each of these areas.

For example, in a blog published in August, Maryland Needs to Improve Its Regulatory Climate – Part II, I offered some specific suggestions for improving the state’s regulatory review process that would provide a more rigorous analysis of the costs and benefits of regulations and assessment of their ongoing effectiveness.

In a July piece, Maryland’s Occupational Licensing Regime Hurts the Poor, my colleague, Free State Foundation Research Associate Michael Horney, explained how overly broad occupational licensing requirements limit economic opportunities for Maryland citizens. As he pointed out, “because consumers ultimately pay higher prices as a result of the restricted competition, the increase in prices is disproportionately harmful to the poorest consumers.”

Another area deserving attention for potential reform relates to business licensing, a close cousin to occupational licensing, but nevertheless distinct. There are literally more than 1000 state licenses that must be obtained in order to start various types of businesses in Maryland. Of course, local governments have their own licensing requirements that apply on top of the state requirements.

The statewide business licenses requirements, administered by the newly named Department of Commerce, are arrayed in 19 different categories, ranging from “Accommodation and Food Services” to “Waste Management and Remediation Services.” I invite you to click on any one of the 19 categories and see how many different licenses are required for various subcategories and sub-subcategories. You will see why the overall number of licenses associated with various businesses exceeds 1000.

Just by way of example, in order to start and operate a race track in Maryland, there are 18 different required licenses. For a restaurant, the number is up to 9; for a landscaping business up to 13; and for a lemonade and baked goods stand up to 3.

I am not suggesting that many of the licenses required are not warranted in order to protect consumers and workers from potential health and safety hazards. But I do suggest that a serious review of the licensing requirements would reveal that it is overbroad and that many of the current license requirements could be eliminated or consolidated.

Simplification and rationalization of the licensing regime will make it easier – and less costly – to start and operate a business in Maryland. In line with other of Governor Hogan's initiatives, this would be another important pro-growth measure that would benefit Maryland’s economy and improve its business climate.

Now that the Department of Commerce has changed its name, perhaps, with assistance from the Maryland Economic Development and Business Climate Commission, it can undertake the important work of reforming the state’s business licensing regime.

Wednesday, September 30, 2015

U.S. Tax Code Is Hurting the Country's Global Competiveness

On September 28 2015, the Tax Foundation released its 2015 International Tax Competitiveness Index (ITCI) and the United States ranks 32nd out of 34 OECD countries. The ITCI ranks countries based on policies which limit taxation of businesses and investment and seek to raise the most revenue with the fewest economic distortions.
The ITCI says the following regarding the United States’ low score:
There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39 percent (combined marginal federal and state rates). Second, it is one of the few countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 48.6 percent) that taxes both dividends and capital gains, albeit at a reduced rate.
The United States was unable to improve from its 2014 ITIC score. This is likely because the U.S. tax code has remained fairly unchanged since the Tax Reform Act of 1986, when Congress reduced the top marginal corporate income tax rate from 46 percent to 34 percent. Since then, many OECD countries have lowered their own rates, reducing the OECD average corporate tax rates from 47.5 percent in the early 1980s to around 25 percent today. The U.S. government actually raised the top marginal corporate rate to 35 percent in 1993, giving the U.S. the highest corporate income tax rate in the industrialized world.
It is important that Congress use the ITCI to understand and address why many U.S. companies have moved their headquarters abroad. Job creation is essential for a growing economy, and lower tax rates and a competitive tax code would allow for entrepreneurs and businesses to invest in new opportunities. Lowering U.S. tax rates, especially the corporate rate, would not only lead to more jobs and higher incomes. Consumers also would pay lower prices as the U.S. expands trade around the globe.

Monday, September 28, 2015


Last week, briefs were filed in the court of appeals by parties challenging the FCC’s preemption of a Tennessee law imposing restrictions on a local government’s ownership and operation of a broadband network. In the same order, the Commission also preempted a similar North Carolina law. In FCC acronym-land, a government-owned network is commonly referred to as a GON.

As in … FCC GON wild.

I have never suggested that, as a matter of policy, GONS should be prohibited in all circumstances at all times. If there are particular areas that private sector broadband providers simply are not serving, and do not intend to serve, then a GONS, or some form of public-private partnership, may be appropriate. But these cases, by far, should be the exception, not the rule.

As my colleague Seth Copper and I explained in a May 2015 article, FCC Preemption of State Restrictions on Government-owned Networks: An Affront to Federalism, in the Federalist Society publication Engage:

A threshold issue is the problematic nature of government assuming the dual role of both enforcer of public law and competitor to private sector providers. This duality poses inherent conflicts-of-interest. For example, local governments may excuse their own networks from running the bureaucratic permitting and licensing gauntlet through which private providers must pass. Fear of disfavored treatment deters private market investment in broadband infrastructure. In addition, questions concerning the institutional incentives and competency of local governments operating capital-intensive advanced communications networks in rapidly innovating markets heighten the concerns of local taxpayers. And speech restrictions that are common in the terms of services of government-owned networks raise significant First Amendment issues.

So GONS are problematic from a policy perspective. But I want to use the occasion of the filing of the initial appellate briefs to emphasize the highly questionable nature of the FCC’s preemptive action as a matter of law. The FCC’s action raises rule of law concerns that are at the heart of our federalist constitutional system.

Our Federalist Society article focused primarily on theses serious legal issues. To my mind, the FCC’s preemption order is sufficiently beyond the authority delegated to the agency by Congress, and beyond the bounds of the Constitution’s federalist structure, that I suggest this is a case of the FCC GON wild. Below are a few excerpts from the article that highlight why the Commission’s action is likely to be overturned in court.

*   *   *
“The most obvious difficulty with basing preemptive authority on Section 706 is that the statute’s language nowhere authorizes it. Section 706(a) provides:

The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all utilizing, in a manner consistent with the public interest, convenience and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.

Preemption is not one of the enumerated measures or methods. Inferring preemption from Section 706(a) is also difficult because of its poor fit with the statutory structure. Section 706(a) recognizes a role both for ‘[t]he Commission and each State commission with regulatory jurisdiction over telecommunications services.’ Federal preemption of state laws imposing geographic or other forms of restrictions or safeguards on government ownership of broadband networks disregards the role of state officials that the statute explicitly acknowledges.”

*   *   *
“In a 1997 order, the FCC rejected a petition requesting it to preempt state law restrictions on municipal telecommunications networks based on Section 253(a) of the Communications Act. … As the FCC’s 1997 order declared: ‘[S]tates maintain authority to determine, as an initial matter, whether or to what extent their political subdivisions may engage in proprietary activities.’ It also observed that preemption ‘effectively would prevent states from prohibiting their political subdivisions from providing telecommunications services, despite the fact that states could limit the authority of their political subdivisions in all other respects.’

This agency precedent cannot be avoided simply because Section 706 is now invoked as opposed to Section 253. The states’ authority to decide ‘whether or to what extent their political subdivisions may engage in proprietary activities’ is not altered just because a particular FCC majority wants local governments to offer broadband services. Federalism principles previously recognized by the FCC, grounded in the Constitution, do not lend themselves to dismissals based on ‘reasonable explanations’ about current Commission policy objectives. For that matter, the 1997 Order recommended states consider restrictions on government-owned networks rather than totals bans. The FCC’s present about-face regarding such restrictions hardly seems reasonable. Indeed, it seems arbitrary and capricious.”

*   *   * 
“The clear statement doctrine requires that Congress speak with unmistakable clarity before federal preemption of ‘a decision of the most fundamental sort for a sovereign entity’ will be considered. The rule is in ‘acknowledgment that the States retain substantial sovereign powers under our constitutional scheme, powers with which Congress does not readily interfere.’ In Gregory v. Ashcroft (1991), the Court reiterated its longstanding jurisprudential requirement that “[I]f Congress intends to alter the ‘usual constitutional balance between the States and the Federal Government,’ it must make its intention to do so ‘unmistakably clear in the language of the statute,’” and that “Congress should make its intention ‘clear and manifest’ if it intends to pre-empt the historic powers of the States…. No fair reading of Section 706 can find any clear statement of congressional intent that the FCC can interpose itself between states and their political subdivisions. And Section 706 cannot be read to clearly state that Congress intended to preempt state authority over decisions about whether and to what extent to allow its political subdivisions to offer proprietary services.”

*   *   *

“Finally, and importantly, the FCC’s preemption of state restrictions on government-owned broadband networks violates constitutional federalism principles. The Supreme Court has stressed that: ‘The Framers explicitly chose a Constitution that confers upon Congress the power to regulate individuals, not States.’ The Constitution established ‘two orders of government, each with its own direct relationship, its own privity, its own set of mutual rights and obligations to the people who sustain it and are governed by it.’ Indeed, ‘[t]he Constitution thus contemplates that a State’s government will represent and remain accountable to its own citizens.’
Local governments are created by state constitutions through state legislation. They are accountable to the citizens of the respective states in which they exist. Thus, the Supreme Court has long recognized that “[s]tate political subdivisions are ‘merely ... department[s] of the State, and the State may withhold, grant, or withdraw powers and privileges as it sees fit.’” Our constitutional regime does not recognize, as a matter of legal status, ‘citizens’ of Chattanooga or Wilson. It does recognize citizens of Tennessee and North Carolina. And the Constitution confers upon these citizens of states the authority to exert their will through their elected representatives to adopt laws that restrict municipal activities. In essence, this is what the Supreme Court reaffirmed in Nixon, declaring that ‘preemption would come only by interposing federal authority between a State and its municipal subdivisions, which our precedents teach, are created as convenient agencies for exercising such of the governmental powers of the State as may be entrusted to them in its absolute discretion.’”

Thursday, September 24, 2015

A Most Shocking Display of Regulatory Overreach

Presidential candidate Jeb Bush has an op-ed in the Wall Street Journal entitled, “How I’ll Slash the Regulation Tax.” There is much in his piece with which I agree, including his conclusion: “Once we remove the burden of overregulation, America will once again reclaim its reputation for inventiveness, energy, and boundless opportunity.”
The use of “reclaim” was deliberate. Mr. Bush began his commentary by pointing out that, according to the World Bank, “the U.S. ranks 46th in the world in terms of ease of starting a business.”
In the course of his piece, Mr. Bush identifies a number of Obama Administration initiatives that he contends have “mired America’s free market in a flood of creativity-crushing and job-killing rules.” He concludes his list with this: “And in perhaps the most shocking display of regulatory overreach, it is regulating the Internet as a public utility, using a statute written in the 1930s.”
Well, Title II of the Communications Act of 1934, under which the Federal Communications Commission has now decided to regulate Internet providers as public utilities, is derived in all essential respects from the Interstate Commerce Act of 1887, which itself was enacted to regulate long-since deregulated railroads. So, in truth, Mr. Bush could have said, “using a statute written in the 1880s.”
But who’s counting? The fundamental point is that the public utility-like provisions of both the Interstate Commerce Act and the Communications Act, which the FCC now has applied to today’s broadband Internet providers, were included in those statues to prevent abuses by monopolistic carriers. This point is indisputable. And it is also indisputable – despite the FCC’s feeble attempt to suggest “gatekeeper” market power in the effort required by consumers to switch among providers – that broadband Internet services are offered in a largely competitive environment.
Most Americans can choose among several different broadband providers to access the Internet, including among four wireless providers that are carrying an increasing amount of broadband traffic. The fact that there are still pockets where this is not the case does not justify subjecting all Internet providers, in all areas of the country, to a public utility regulatory regime.
The extent to which Chairman Wheeler and his two Democrat colleagues are willing, perhaps even eager, to look backwards in time – as though looking through a rear view mirror – to justify their stringent approach to regulating Internet providers should be clear to all. At the very outset of its Court of Appeals brief, the FCC begins its defense of its Internet regulation order by stating: “The roots of the [Open Internet] debate can be traced back to 1980 and Computer II, … in which the Commission separate data-processing activities from the telecommunications services regulated under Title II in order to enable new information services to flourish free from the ‘bottleneck’ power of telephone companies.” [FCC Brief, at 10.] The agency’s brief declares the purpose of the Computer II regime, with its strict definitional separation of “telecommunications” and “information services” was “to establish a regulatory framework supporting development of the nascent information economy free from interference by the traditional providers of telecommunications services.” [FCC Brief, at 11.] Even a casual glance at the brief reveals the extent to which the Commission harkens back to 1980 in an effort to find support for its current order imposing Title II regulation on today’s Internet service providers.
But this backwards-looking approach is highly problematic. As you can see from the above (and you can read the FCC’s lengthy Computer II order and reconsideration orders for much more of the same), the Commission’s action in 1980 was clearly premised on the assumption that the “telephone companies” possessed “bottleneck” power and that information services were “nascent.” This may have been true then, but it is simply not true 35 years later. Today’s broadband Internet providers (there no longer are “telephone companies” in the sense the Commission used the term in 1980) operate in a competitive environment, and information economy providers like Google, Facebook, Twitter, eBay, and so forth are anything but nascent.
Above all, understood through the lens in which regulations ought to be properly assessed, whatever the case in 1980, in 2015 no demonstrable evidence exists of market failure or consumer harm justifying the Commission’s imposition of public utility regulation on Internet providers.
I am no expert regarding many of the Obama Administration’s regulations in other areas. But it doesn’t surprise me at all that Jeb Bush calls the FCC’s action perhaps the Obama Administration’s “most shocking display of regulatory overreach.”